Bill Ackman sees Federal Reserve staying hawkish as market turns dovish

Bryan Bedder

With the market pricing in a peak federal funds rate of 3.4% in December then falling to 2.7% by YE2023, Federal Reserve Chairman Jerome Powell is likely to be asked at his press conference Wednesday what factors would cause the central bank to start lowering rates, billionaire hedge fund investor Bill Ackman said via tweet Tuesday morning.

That situation presents a conundrum, he added. “Interestingly, the more the market believes that the Fed will immediately reverse course, the less effective raising rates will be in moderating inflation, and the more the Fed will have to raise rates,” Ackman explained. He contends that inflation has become embedded in the U.S. economy, which is exactly what the Fed has been trying to avoid.

Powell has addressed the question before. During his testimony before the U.S. House Committee on Financial Services on June 23, he said he’d be “reluctant” to reduce the federal funds rate until there are clear signs that inflation has come under control. “We’re going to want to see evidence that [inflation] really is coming down before we declare any kind of victory,” he said.

Ackman expects Powell to hold his “hawkish resolve on not only maintaining higher rates for longer, but also being open to a terminal rate meaningfully higher than 3.4%.”

The most recent reading of the consumer price index, which is for the month of June, showed no relief in inflation, rising 9.1% Y/Y, accelerating from May’s increase of 8.6%.

The Fed, though, prefers to look at personal consumption expenditures, a gauge that reflects consumer behavior of substituting cheaper items when prices rise. The CPI, by contrast, measures the prices on fixed basket of items.

The latest PCE reading was for May, showing that the headline PCE price index increased 6.3% Y/Y, the same rate as in April and core PCE price, excluding energy and food, rose 4.7%, down slightly from 4.9% a month earlier.

June PCE data comes out on Thursday, a day late for the Fed’s policy meeting.

Previously (July 15), Traders trim expectation for next Fed rate hike to 75 basis points from 100 bps

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